There are times when you may face an unexpected financial emergency and borrow a personal loan to tide over the situation. There could also be situations when you avail a loan for some big purchases such as a home. However, having availed of a loan, you may suddenly be unable to pay your EMIs on time because of a sudden job loss or a serious medical condition which you may not have anticipated.
In circumstances when you can’t meet repayment schedules because of genuine reasons such as a sudden job loss or a health crisis, you may have to approach the bank for a settlement. The bank may offer an option that allows you a one-time settlement. This option may be given after six months of non-payment of EMIs. The bank will offer a loan settlement only if it is convinced about the borrower’s reasons for non-payment. If the borrower has suffered a serious illness or an accident, the bank may agree to write off a portion of the amount that is outstanding at the time of settlement and consider the case settled.
What is the loan settlement impact on CIBIL score? Does the EMI settlement affect your track record? When the bank writes off a portion/outstanding loan amount or offers a one-time settlement to the borrower, the bank reports the same to credit bureaus such as the Credit Information Bureau (India) Ltd (CIBIL). CIBIL provides credit scores of borrowers and credit cardholders. A credit score above 750 is considered good by borrowers and the score ranges between 300 and 900, with 900 being the best score.
When there’s a loan settlement, it is reflected as such in the credit report and not as a closed account. Unlike a closed account, a settled account does impact the CIBIL score. The credit bureau does not categorise the account as closed and instead considers it a settlement, which deducts some points from the borrower’s CIBIL score. This drop may be as steep as 100 points. Your loan application at any point in the future may have a chance of being rejected because of the drop in CIBIL score. The settlement tag is retained in your credit report for as long as seven years.
If a borrower opts for a loan settlement, the lender directs the borrower to pay a part of the outstanding amount. This amount can be negotiated with the bank.
The bank also looks into the capacity of the borrower to repay before deciding on the amount. If the bank officials are convinced that the case is genuine and the borrower is seriously ill, has met with a serious accident or has suffered an unexpected job loss, and the borrower is in no position to repay, it may even consider writing off the entire outstanding amount. There is a time frame allotted for the settlement, typically six months.
If the loan is due in over three months, it is considered a non-performing asset. After six to nine months of the due date of EMI payment, the bank may write off the loan. If an EMI settlement occurs before such a written-off, it is termed ‘settled’. If the EMI settlement happens after the write-off, it is considered a ‘post-write-off settlement’ in the individual’s credit report. In either case, it impacts the borrower’s credit score.
When borrowers realise that they are not capable of repaying a loan and the bank offers a one-time loan settlement offer, it may seem like the best possible situation at that point.
However, borrowers can look into other options because settlement impact on CIBIL score is negative and affects loan applications in the future. The one-time settlement should be considered the last option.
Before that, you could try to liquidate any other assets like property or other securities in your portfolio.
If you have no other asset to sell, maybe you could seek help from family or friends.
Try and talk to the bank to extend the repayment period or waive interest for a specific timeframe. You could try to renegotiate the terms of repayment rather than opt for a settlement.
Also, while you borrow a loan, if you have some option as collateral, it could help you avoid settlement. The bank may sometimes not need collateral from you, but it helps to have some collateral in place. You could also opt for some insurance on your loan when you borrow. These two options will ensure that your payments are not stopped, and you could avoid a settlement.
If all these options are not available to you and you have to go in for a one-time loan settlement, ensure that you check your credit score. If you know where you stand, you could make some efforts to boost your credit score in the near future by repaying any other loans or ensuring that there are no dues on your credit card.
If you have availed of a loan and have for some reason not been able to repay on time, remember that a one-time settlement option of the loan should be your last resort. The one-time settlement impact on CIBIL score is negative. Your credit score may drop by up to 100 points. When you approach banks in the future, it may lead to a rejection of your future loan applications. Instead, it is best if you explore other options, such as seeking an interest waiver or extending the repayment period. Also, remember that when you avail a loan, have a contingency plan in mind to tide you over a financial emergency.